Insurance Business Chapter- 25
net of adjustments under sections 22(8), 23(8) and 23(11) of the Insurance Ordinance, 2000 so as to
exclude from it any expenditure other than expenditure which is, under the provisions of Part IV of Chapter
III, allowed as a deduction in computing profits and gains of a business to the extent of the proportion of
surplus not distributed to policy holders.
From the accounting perspective, it is important to place on record that a life insurance contract is invariably
a long term contract, indeed a long term investment contract. Therefore, at the date of balance sheet, the
liability in respect of future claims has to be given due consideration. This is so because in future years, the
premium to be received against ongoing policies would be much less than the claims which may become
payable against those policies. This difference is known as “net liability”. It then follows that unless a life
insurance company has reserves equal to the net liability, the company would be considered to have made
no profit.
However, under the tax law, the formula to compute the Profit and gains of life insurance business is as
under:
Profit and gains of a life Insurance Business = Annual Average of surplus
Less adjustment of surplus or deficit disclosed by actuarial valuation made for the last inter valuation
period ending before the tax period
Add surplus or deficit included therein which was made in any earlier inter valuation period and
expenditure allowed as a deduction
Computation of the surplus
The following provisions shall apply in computing the surplus:
(a) The amounts
paid to,
or reserved for, or expended on behalf of policy-holders
Shall be allowed as a deduction;
However:
(a) in the first computation of the surplus, no account shall be taken of amounts to the extent to
which they are paid out, or in respect of any surplus brought forward from a previous inter-
valuation period; and
(b) if any amount reserved for policy-holders ceases to be so reserved, and is not paid to, or
expended on behalf of policy-holders, the sums previously allowed as a deduction under this
Ordinance shall be treated as part of the respective statutory fund for the tax year in which the
amount ceased to be so reserved.
The transfer of any amount to reserve although allowed as deduction in computing the surplus.
However, in case the said reserve is not utilized for the purpose intended, then, the whole of the sum
set apart for reserve and allowed as deduction previously will be added in the surplus of the
prevailing tax year of that time.(b) Any amount
- either written off or
- reserved in the accounts, or
- through the actuarial valuation balance sheet to meet depreciation, or loss on the realization of
investments
shall be included in the surplus
However, any sums taken credit for in the accounts or actuarial valuation balance sheet on account
of appreciation or gains on the realization of investments shall be allowed as deduction; and